Buying a lot, selling a little

Less than two months ago, we speculated that Broadcom would be cleaning out the closet at CA Technologies once it owned the enterprise software company. On cue, the semiconductor giant announced Monday that it had closed its $19bn purchase of CA and, in virtually the same breath, said it had divested one of the just-acquired businesses. The unwinding of Veracode almost certainly won’t be the last pruning of the CA portfolio done by the financial hawks at Broadcom.

But first, on the announced deal: Thoma Bravo said it will spend $950m to carve application security provider Veracode out of the now-Broadcom-owned CA. The transaction effectively unwinds CA’s pickup of Veracode two and a half years ago. In a reversal from most of these moves, CA’s exit price is significantly richer – nearly 50% higher – than its entry price. (451 Research subscribers can look for our full report on the deal on our website tomorrow.)

While not unexpected, Broadcom’s divestiture nonetheless comes at a time when corporate castoffs are running at a multiyear low. According to 451 Research’s M&A KnowledgeBase, publicly traded tech companies like Broadcom are on pace in 2018 to print the second-fewest divestitures of any year since the recent recession. Further, our database indicates that this year will see listed tech vendors shed roughly one-quarter fewer business than the average year over the past decade.

Broadly speaking, the surge in earnings this year at tech giants and, until recently, their record-high equity prices has blunted the need for most companies to radically overhaul their businesses. Growth masks a lot of flaws. In any downturn, we would expect the pace of divestitures to pick up.

In the case of Broadcom, however, its move wasn’t so much macro-driven as it was just a case of hitting an internal target. Specifically, the chipmaker, which runs a tight ship, laid out the goal of ‘long-term adjusted EBITDA margins’ above 55% once it fully integrated CA.

There’s a fair amount of wiggle room in both the timing and financial measure of that target. But it suggests that more divestitures are coming. Most of CA’s enterprise software business doesn’t run anywhere close to the margins Broadcom has modeled. In contrast, CA’s mainframe business, which is roughly half of total revenue, throws off a ton of cash.

If we had to guess at another acquired business that Broadcom is likely taking a hard look at right now, we wonder if CA’s mid-2015 acquisition of Rally Software Development might also get unwound. (The business is now known as Agile Central.) The Agile software development shop relied on a fair amount of professional services (mid-teens percent of total revenue), which pressured margins and kept the business running in the red. Unless CA has dramatically improved the business, Rally may not make the cut.